FBN Securities: Possibility Of Future Dell Takeout Adds Premium To VMware Shares

Dell Technologies Inc (NYSE: DVMT) announced Monday the conclusion of strategic review and an agreement to exchange Class V tracking stock for Dell Technologies Class C common stock or an optional cash election.

The Class C shares will be listed on the NYSE, making Dell a public company yet again.

The Analyst

Analyzing the implication of the announcement for VMware, Inc. (NYSE: VMW), FBN Securities analyst Shebly Seyrafi maintained an Outperform rating on the stock with a price target lifted from $160 to $180.

The Thesis

The transaction announced by Dell Technologies avoids a not-so-palatable reverse merger scenario and provides leeway for Dell to trade as a public company again, Seyrafi said in a Monday note. (See the analyst's track record here.)

A reverse merger would have saddled VMWare with more debt, disrupting its business, the analyst said. The $11-billion dividend VMware has opted to pay its shareholders, including $9 billion paid to Dell Technologies, has served to reduce its gross cash position to $1.63 billion, he said. 

VMWare's net cash position is reduced from a positive $8.34 billion to a negative $2.6 billion, Seyrafi said. 

"But we estimate that VMW will have a fiscal 2019 FCF of $3.34 billion, so we expect VMW to go back to a positive net cash position in late fiscal 2019," the analyst said. 

The development, apart from avoiding a reverse merger scenario, also raises the possibility of VMware being acquired by Dell in the future, in FBN's view, creating a "growing takeout premium" for VMWare, Seyrafi said. 

The Price Action

After jumping 10.24 percent to $162.02 Monday, VMWare shares were trading down 0.19 percent at $161.61 at the time of publication Tuesday.

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Photo courtesy of VMWare.